Using Structured Settlements to Help Resolve Legal Disputes in the Entertainment Industry

November 5, 2010

As a consultant and expert witness in the entertainment industry, the vast majority of cases that cross my desk are for economic damage or loss of wages claims. Most of the cases have been for personal injury, worker’s compensation, copyright infringement and wrongful death, with claims ranging from $250,000 to $90 Million. In all of the cases, whether settled in or out of court, the final settlements were for significant dollars.

Clearly the way these settlements are paid out can have an effect on one’s tax liability. Having never been the recipient of such a large claim, I had never looked into how the payout would be distributed or the choices available in the marketplace. However, I have recently been introduced to a concept called “Structured Settlements” which I found to be quite interesting and worthy of sharing with you.

According to Dan Finn of the Finn Financial Group, a firm specializing in providing structured settlement benefits to qualifying individuals, “It’s safe to assume most attorneys who handle bodily injury, wrongful death, medical malpractice, and workers’ compensation cases are aware of the value of structured settlements since they have been in use for more than 25 years. But there are many other areas where structured settlements could help effectively resolve conflicts if only they would be considered. Entertainment-related disputes are high on that list.”

For those of you not in the know, here is a brief summary:

When a plaintiff settles a case for a large sum of money, sometimes the defendant and/or plaintiff’s attorney, in consultation with a qualified financial expert familiar with structured settlements, will propose paying the settlement in installments over time rather than as a single lump sum. A structured settlement can provide for payment in pretty much any schedule the parties agree to. For example, the settlement may be paid in annual installments over a number of years, or it may be paid in periodic lump sums every few years. For more information on structured settlements please check out the links at the bottom of this article.
Structured settlements are often used by defendants and plaintiffs when the two are involved in personal physical injury disputes. Years ago, Congress passed laws to extend preferential tax-treatment for these types of settlements per IRC 104(a) (1) & (2) and IRC 130. The applications of these are obvious. The settling parties arrange for the purchase of a specialty annuity which, unlike “regular” annuities, pays out future dollars that are 100% income tax-free.

Less common and significantly underutilized is the application of structured settlements to taxable settlements. Since numerous disputes in the entertainment industry are non-injury related, the damages paid will be taxable and this can trigger unintended and undesirable tax consequences for the plaintiff. In many of these cases, the settlement can be enhanced by arranging to defer some of the proceeds, along with the accompanying tax burden, by using a carefully crafted structured settlement specifically designed for such a purpose.

Types of taxable disputes where it may make financial sense to look at structured settlements include:

o Celebrity Endorsements
o Copyright infringement
o Contractual nonperformance
o Property disputes
o Slander, libel, damage to reputation
o Sexual harassment
o Civil rights violations
o Employment disputes excluding wages (wrongful termination, ADEA, etc.)

A structured settlement may be helpful to both parties to the dispute during negotiations. If used appropriately during settlement talks, the parties can often avoid trial by allowing the defendant to settle within their evaluation while projecting a payout closer to or exceeding what plaintiff is demanding. And most importantly, plaintiffs can potentially keep more of their award by reducing the tax burden.

Oftentimes celebrities who receive their first big endorsement (or for that matter any individual receiving a large fee for the first time) may very quickly blow through that fee. A structured settlement can help with budgeting so that the fee can last a lifetime rather than a couple of years.

There may be downsides to this type of payment plan, however. Because the terms of the structure must be negotiated and fixed prior to the conclusion of the settlement, the recipient cannot change the terms once finalized. This lack of liquidity makes proper planning essential. Because plaintiffs, from time to time, may need a big chunk of money for unforeseen expenses such as hospital bills, the purchase of a home or other large items, parties are wise to make sure they allocate sufficient resources up front to cover such contingencies. Clearly it is important to discuss the options thoroughly with a lawyer, a Certified Structured Settlement Consultant and/or tax advisor, to determine if a structured settlement is the way to go for the payout.

Interesting reference material:

– Overview on Structured Settlements by National Structured Settlements Trade Association

– Consulting and Advisory services provided by Finn Financial Group

– Basic Information from Wikipedia.

This article is intended to provide general information only, not legal advice. Please consult an attorney for advice in connection with structured settlements or any of the issues addressed in this article.

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